Market based forward looking estimate of future expected returns are obtained using one of the following:
A) Estimation of the market probabilities from the prices at which derivative securities trade.
B) Historical data to estimate expected returns and measures of risk
C) Estimation of equity risk premium
D) Earning-price ratio and dividend-price ratio.

Question

Quizplus · Accepted Answer

Market probabilities from the prices at which derivative securities trade, such as options, can provide a forward-looking estimate of future expected returns. This approach is based on the idea that option prices reflect the market's expectations of the underlying asset's future price movements and can be used to estimate the probability of different outcomes. It is considered to be a more accurate predictor of future returns than historical data, as it takes into account current market expectations and sentiment.

Market Based Forward Looking Estimate of Future Expected Returns Are